Tuesday, August 14, 2018

I’m continually amazed at the legions of politicos, pundits and so-called “experts” who don’t understand President Trump or how he conducts policy.

These elites have a mental model of how a president is supposed to behave and how the policymaking process is supposed to be carried out. Obviously, Trump does not fit their model.

Instead of trying to grasp the model that Trump does use, they continually berate and disparage Trump for not living up to their expectations. A more thoughtful group would say, “Well, he’s different, so why don’t we try to understand the differences and analyze the new model?”

Really, these people need to get out of Washington, New York and Hollywood more and get away from their screens. If they knew more everyday Americans, they would come a lot closer to understanding how Trump gets things done.

It’s not chaos; it’s just a little different and more down to earth.

This is because of Trump’s “art of the deal” style described in his best-selling book by that name. Bush 43 and Obama were totally process-driven. You could see events coming a mile away as they wound their way through the West Wing and Capitol Hill deliberative processes.

All you had to do was understand the process and you could forecast big developments in a relatively straightforward way.

With Trump, there is a process, but it does not adhere to a timeline or existing template. Trump seems to be the only process participant most of the time.

If the opponent backs down, mitigate the threat, declare victory and go home with a win.

If the opponent fires back, double down. If Trump declares tariffs on $50 billion of good from China,and China shoots back with tariffs on $50 billion of goods from the U.S., Trump doubles down with tariffs on $100 billion of goods, etc. Trump will keep escalating until he wins.

Eventually, the escalation process can lead to negotiations with at least the perception of a victory for Trump (North Korea) — even if the victory is more visual than real.

No one else in Washington thinks this way. Washington insiders try to avoid confrontation, avoid escalation, compromise from the beginning and finesse their way through any policy process.

Trump is in a league of his own. What amazes me is that the media still do not understand his style and keep taking the bait when he announces something crazy, as in Step 3 above...

Saturday, August 11, 2018

"When we consider recent financial catastrophes affecting U.S. investors only, without regard to other types of disaster, we have had major stock market crashes or global liquidity crises in 1987, 1994, 1998, 2000 and 2008.

That’s five major drawdowns in 31 years, or an average of about once every six years. The last such event was 10 years ago. So the world is overdue for another crisis based on market history.

Does any of this mean you should go to your fortified bunker and curl up in a ball? Of course not. We all wake up every morning and face the day, come what may. I’m not paralyzed by fear and neither should you be.

But it does mean that we need to overcome any cognitive bias about the future being like the past or about recent calm being a good forecast for the future (called “recency bias” by behavioral psychologists).

When the 100-year flood does hit, it’s too late to buy flood insurance. Likewise, when the next financial crisis hits, it will be too late to buy gold at today’s relatively attractive prices. The best time to buy flood insurance is when the sun is shining."

Thursday, August 9, 2018

One of the long-standing reasons to own physical gold or invest in gold mining shares is to hedge geopolitical risk or the risk of natural disaster.

From the Black Death in the 14th century to the Thirty Years’ War in the 17th century to the world wars of the 20th century, gold has been a reliable store of wealth. There is no reason to believe that such existential events are no longer a danger.

I don’t think you need any reminder of the litany of risks present today.

The United States is determined to prevent Iran from obtaining nuclear weapons. Iran is equally determined to develop them. Iran’s neighbors, such as Saudi Arabia, have said that if Iran obtains nuclear weapons, they will quickly do the same.

In that case, Turkey and Egypt would follow suit. The choices boil down to a conventional war with Iran or a wider nuclear arms race in a highly volatile region.

North Korea already has an arsenal of nuclear warheads with a yield approximately the size of the Hiroshima atomic bomb, about 15 kilotons of TNT, but it has tested much larger weapons. It has also developed intermediate-range ballistic missiles (IRBMs) and has tested intercontinental ballistic missiles (ICBMs).

Denuclearization discussions are ongoing between the U.S. and North Korea, but President Trump has made it clear that he will attack North Korea if it advances further toward its stated goal of having a deliverable nuclear weapon that can reach the U.S.

If talks fail and the U.S. does attack North Korea, it is likely that North Korea will unleash devastating force on South Korea and possibly launch a nuclear weapon aimed at Japan.

Venezuela is a political and humanitarian catastrophe and is approaching the level of a failed state, which could result in civil war, riots, mass refugees and a cut off of its oil exports, about 3% of the world total today.

Its inflation rate is now running at over 40,000%. That means its hyperinflation has officially exceeded Weimar Germany’s, where the highest recorded monthly inflation rate was “only” 29,500%. The IMF now forecasts Venezuela’s hyperinflation will reach 1,000,000% by the end of the year.

Other hot spots around the world include Syria, Ukraine, Israel and its confrontation with Hamas and Hezbollah, the Saudi war with Iranian-backed Houthi rebels in Yemen and conflicting claims in the South China Sea.

That’s just scratching the surface. Natural disasters abound from the extreme flooding of Hurricane Harvey to the lava flows of Kilauea on Hawaii. The Ebola virus has reemerged in the Congo, four years after a prior epidemic in West Africa caused 10,000 deaths. Other threats are ubiquitous.

New threats are also emerging that are not traditionally geopolitical or natural. These include power grid collapses, cyberwarfare, hacking, data theft and misuse of big data including examples such as Russian interference in recent U.S. elections. Killer robots, swarm attack drones and rogue artificial intelligence applications are coming soon.

An investor would not be blamed for saying, “So what?” Many of the threats mentioned have been festering for years. Going back further in time would produce a different list of threats, most of which never came to fruition.

Americans, in particular, seem safe from the worst of these threats except for the temporary effects of a bad storm or wildfire in a specific area. To most Americans, these threats are just background noise. Complacency rules the day.

But here’s an interesting bit of math, somewhat simplified, that might break investors out of their complacency. Don’t worry about the details, but I strongly urge you to focus the implications.

Let’s consider a “100-year flood,” which can literally be a 100-year flood like Hurricane Harvey or a metaphorical rare event, a so-called “Black Swan.”

Let’s call “P” the probability of a 100-year flood in a known flood zone and consider the odds of the flood happening or not happening each year in a succession of years...

Monday, August 6, 2018

This will not involve dead-end cryptocurrencies like bitcoin but entirely new utility tokens and cryptos. Imagine something like a putincoin and you’ll be on the right track.

China is pushing its trade counterparties to accept Chinese yuan as payment for goods and services. The yuan is a small part of global payments today (about 2%) but the yuan may get a boost as the U.S. sanctions on Iran kick in.

China is Iran’s biggest customer for oil, and if U.S. sanctions prohibit dollar payments for Iranian oil, then Iran and China may have no choice but to transact in yuan.

The International Monetary Fund, IMF, has already announced efforts to put its world money, the special drawing right, SDR, on a distributed ledger. This would make the SDR a global cryptocurrency for settling balance of payments transactions among China, Russia and other IMF members, also without reliance on the dollar payments system.

Alongside the new money in cryptocurrencies, there is the oldest form of money, which is gold. The use of gold is the ideal way to avoid U.S. financial warfare.

Gold is physical so it cannot be hacked. It is completely fungible (an element, atomic number 79) so it cannot be traced. Gold can be transported in sealed containers on airplanes so movements cannot be identified through wire transfer message traffic or satellite surveillance.

There is good evidence that Iran currently pays for North Korean weapons technology with gold, and good reason to expect that future Chinese payments for Iranian oil will be made at least partly in gold.

Imagine a three-way trade in which North Korea sells weapons to Iran, Iran sells oil to China and China sells food to North Korea. All of these transactions can be recorded on a blockchain and netted out on a quarterly basis with the net settlement payment made in gold shipped to the party with the net balance due. That’s a glimpse of what a future nondollar payments system looks like.

Finally, look at the evidence presented in Chart 1 below. This shows Russia’s reserve position from 2013–18. The reserve position collapsed from $540 billion to $350 billion as a result of the oil price crash beginning in late 2014. (And query whether the oil price collapse itself was engineered by the U.S. in retaliation for Russia’s annexation of Crimea).

Since early 2015, Russia has rebuilt its reserve position under the patient stewardship of Russian Central Bank head Elvira Nabiullina. Russian reserves are now back up to $460 billion and rising steadily.

Yet there’s one huge difference between Russian reserves in 2014 and those reserves today. That difference is gold. During the reserve collapse in 2014, Russia sold U.S. dollar assets as needed to maintain liquidity, but it never stopped buying gold.

Russian gold reserves rose from 1,275 tons in mid-2015 (near the reserve low) to 1,909 tons at the end of April 2018. That’s a 50% increase in gold reserves in less than three years. Using current market prices, the Russia gold hoard is worth about $90 billion, or 20% of Russia’s global reserve position.

Why would a country put 20% of its reserves into gold unless it expected gold to be a major part of the international monetary system in the future? It wouldn’t. Russia not only expects gold to be part of the system, it is in strong position to make that happen by working with China, Turkey and Iran in what I call the new “Axis of Gold.”

The bottom line is that the weaponized dollar will soon be a victim of its own success. While the U.S. was bullying the world with dollars, the world was quietly preparing a new nondollar system. The U.S. wanted diplomatic and military clout and it got it with the dollar.

But as the saying goes, “Be careful what you wish for.”

Wise investors will prepare now for a new nondollar payments system. You may not be able to buy crypto SDRs (yet), but you can certainly own gold, and you should.

Saturday, August 4, 2018

America’s most powerful weapon of war does not shoot, fly or explode. It’s not a submarine, plane, tank or laser. America’s most powerful strategic weapon today is the dollar.

The U.S. uses the dollar strategically to reward friends and punish enemies. The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.

The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies without firing a shot.

Before turning to specific tactics, consider the following. The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions. European banks that make dollar-denominated loans to customers have to borrow dollars to fund those liabilities.

Those banks do their borrowing in the eurodollar deposit market, or with dollar-denominated commercial paper or notes. Being based in Switzerland or Germany does not allow you to escape from the dollar’s dominance.

The U.S. not only controls the dollar itself. It controls the dollar payments system. This consists of the Treasury’s digital ledger of holders of U.S. debt, the Fedwire payments system among U.S. Fed member banks and the Clearing House Association (successor to the New York Clearing House and proprietor of CHIPS, the Clearing House Interbank Payments System) composed of the largest U.S. banks.

A dollar payment going from a bank in Shanghai to another bank in Sydney runs through one of these U.S.-controlled payments systems.

In short, the dollar is the oxygen supply for world commerce and the U.S. can cut off your oxygen whenever it wants.

The list of ways in which the dollar can be weaponized is extensive. The International Emergency Economic Powers Act of 1977, IEEPA, gives the president of the United States dictatorial power to freeze and seize assets and block payments.

The Treasury’s Office of Foreign Assets Control, OFAC, maintains a blacklist of individuals and companies with whom financial intermediaries, such as banks and credit card companies, are forbidden to transact. Individuals on the OFAC list are like dead men walking when it comes to travel and business.

The Committee on Foreign Investment in the United States, CFIUS, can block any foreign acquisition of a U.S. company on national security grounds.

This list of financial weapons goes on, but you get the idea. The U.S. uses the dollar to force its enemies into fronts, crude barter or the black market if they want to do business.

Examples of the U.S. employing these financial weapons are ubiquitous. The U.S. slapped sanctions on Russia after the 2014 annexation of Crimea and invasion of Eastern Ukraine. The U.S. waged a full-scale financial war with Iran from 2011–13 that resulted in bank runs, hyperinflation, local currency devaluation and social unrest.

The U.S. was pushing Iran to the brink of regime change in 2013 when President Obama declared a truce to pursue what became the Joint Comprehensive Plan of Action, JCPOA, or the Iran nuclear deal. President Trump has now ended that deal and the financial war with Iran has resumed where it left off in 2013, but tougher than ever.

The U.S. is slapping stiff Section 301 penalties on China for theft of intellectual property. Other obvious victims of U.S. financial weapons are North Korea, Syria, Cuba and Venezuela.

The actions described above did not arise in the normal course of trade and finance. The Russian, Iranian and other sanctions noted are explicitly geopolitical, while the Chinese sanctions are geostrategic to the extent the U.S. and China are vying for technological supremacy in the 21st century.

None of these sanctions would be effective or even possible without the use of the dollar and the dollar payments system.

Yet for every action there is a reaction. America’s adversaries realize how vulnerable they are to dollar-based sanctions. In the short run, they have to grin and bear it. They’re fully invested in the dollar both in their reserves and in the desire of their largest companies like Gazprom (Russia) and Huawei (China) to become major global players.

Transacting on the world stage means transacting in dollars.

And dollar-based sanctions are a powerful financial weapon for the U.S. But our adversaries and so-called allies are not standing still. They are already envisioning a world where the dollar is not the major reserve and trade currency.

In the longer run, Russia, China, Iran, Turkey and others are working flat-out to invent and implement nondollar transactional currencies and independent payments systems.

Russia has begun a major research and development effort in the area of distributed ledger technology (also known as “blockchain”) so that financial transactions can be processed and verified without reliance on Western-controlled banks...

Wednesday, August 1, 2018

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the over-leveraged banking sector.

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.

Monday, July 30, 2018

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this…

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% — a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.

Many investors will be caught completely unprepared.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

Tuesday, July 24, 2018

When gold crashed on Monday, dragging market prices down to a low of $1321.50 an ounce from levels around $1560 only days before, holders of physical gold saw the value of their holdings decline as well.

However, we've seen a lot of claims that somehow there's a difference between the market for physical gold (people buying gold bars or gold coins) and that for "paper" gold (which refers to gold futures traded on the COMEX or shares of GLD, the gold ETF).

Jim Rickards, a prominent gold bull and author of the book Currency Wars, told Business Insider that the disconnect between the two markets evidenced by the crash on Monday is not one of price, but "in terms of behavior, in terms of people's responses to market developments."

According to Rickards, the "weak hands" in the gold market were the over-leveraged buyers of gold futures and ETFs that caused prices to plummet in the recent sell-off.

"If you're an un-levered buyer of bullion - say, 10% of your investable assets - you kind of watched the headlines and watched the ticker [as gold crashed] on Thursday, Friday, and Monday, but it didn't affect you," says Rickards.

Below, Rickards expands on the analogy and explains where the hedge funds fit in:

Gold ownership is now divided between strong hands and weak hands. The strong hands are Russia, China, some of the other central banks, and anybody else who is buying gold for cash in physical form, without leverage.

The weak hands are retail jumping into GLD, at a top, using margin, futures players, and people who don't really understand gold. There are a lot of trend followers out there who started following gold on a trend basis, but didn't really understand anything about gold, or how it works, etc.

The hedge funds turn out to be weak hands, not strong hands. The reason is they've got redemptions. Hedge funds don't have permanent capital. They may have monthly redemptions, or quarterly redemptions, or one-year lockups, or whatever it is, but it's not permanent capital.

Saturday, July 21, 2018

"Ukraine, South Africa and Chile are also highly vulnerable to a run on their reserves and a default on their external dollar-denominated debt.

The only issue now is whether the new crisis will be contained to Argentina and Venezuela or whether contagion will take over and ignite a global financial crisis worse than 2008.

It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis.

This new crisis could take a year to spread, so it’s not too late for investors to take precautions, but the time to start is now.

The Fed’s path of rate hikes and balance sheet reductions since December 2015 has reinvigorated the U.S. dollar, as I explained above. A stronger dollar means weaker EM currencies in general. Again, that’s exactly what we’ve seen lately. Right now, EM currencies are in free fall against the dollar.

But here’s a curveball question for you:

Now that the Federal Reserve raised rates again last month, is the bottom in for emerging-market currencies? And is the top in for the dollar?"

Wednesday, July 18, 2018

The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions.

So the dollar’s strength or weakness can have an enormous impact on global markets.

Using the Fed’s broad real trade-weighted dollar index (my favorite foreign exchange metric, much better than DXY), the dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3).

Right now, the index is 95.2, below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets (EM) debtors who borrowed in dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength.

And EM lending has been proceeding at a record pace.

Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

When the focus is put on specific EM currencies, the dollar’s appreciation in some cases is 100% or more.

Much of this dollar appreciation has been driven by the U.S. Federal Reserve’s policy of raising interest rates and tightening monetary conditions with balance sheet reductions. Meanwhile, Europe and Japan have continued easy-money policies while the U.K., Australia and others have remained neutral.

The U.S. looks like the most desirable destination for hot money right now because of interest rate differentials. And that is having far-reaching consequences on EM economies.

A new EM debt crisis has already started. Venezuela has defaulted on some of its external debt, and litigation with creditors and seizure of certain assets are underway. Argentina’s reserves have been severely depleted defending its currency, and it has turned to the IMF for emergency funding...

Sunday, July 15, 2018

Jim Rickards joined Kitco News and Daniela Cambone to discuss the latest news and analysis from gold markets, geopolitics and even bitcoin. The Wall Street veteran took on the bigger picture facing metals investors and what could be just around the corner in a bubbling market.

When asked why certain geopolitical tensions have greater impacts on gold and hard assets than others Rickards remarked, “There are two things going on, first is that the North Korean missile threat goes from high tension to back down again. This is a very serious threat and we are headed for war with North Korea. While I don’t know what it will take to not just get gold to go up but stocks and other sectors, ultimately markets are going to be impacted.”

Thursday, July 12, 2018

"So, I would say two things about the monetary collapse. No. 1, it could happen very suddenly — and likely it will — and we won’t see it coming, so investors need to prepare now.

Investors almost say to me, ‘You know, Jim, call me up at 3:30 the day before it happens and I’ll sell my stocks and buy some gold.’

First of all, it doesn’t work that way for the reasons I just explained, but secondly, you might not be able to get the gold and that’s very important to understand. When a buying panic breaks out, you know, and the price starts gapping up, not $10.00, $20.00 an ounce per day, but $100.00 an ounce then $200.00 an ounce and then all of sudden, it’s like up $1,000.00 an ounce and people say oh, I got to get some gold. You won’t be able to get it. The big guys will get it, you know, the sovereign wealth funds, the central banks, the billionaires, the multibillion-dollar hedge funds, they’ll be able to get it, but everyday investors won’t be able to get it.

You’ll find that the mint stops shipping it. That your local dealer has run out so there’ll still be a price somewhere. You’ll be able to watch the price on television, but you won’t actually be able to get the gold. It’ll be too late."